Blood in the Water

I wrote a couple weeks ago (see here) about the ignition switch fiasco being the equivalent, for GM, of Titanic’s hitting the iceberg. A likely mortal wound. That it might now be only a matter of time before the inevitable slipping into oblivion.

Confirmation came this week.

Virtually all of GM’s first quarter profits have – poof – disappeared. Passed beyond the event horizon, into the financial black hole, ever-widening, that may eventually consume the briefly resuscitated corpse of America’s formerly number one car company.

The estimated cost – so far – of the recalls is in the neighborhood of $1.3 billion. Even for a giant corporation, that is real money.

But it may be just a drop in the proverbial bucket. Because it does not take into account the costs of dealing with – settling – the lawsuits. The claims to be made by millions of people. Seven million, to be precise. That is the number of vehicles manufactured by GM with the defective ignition switch. Each of those seven million will want money. Not just to fix the car. But to compensate them for being saddled with a lemon – a known lemon. Some will insist on buybacks. Others will want a check commensurate with the depreciated value of their lemon. Even if it ends up being only a couple hundred bucks per car – times seven million, well, that’s a lot of shekels.

And it doesn’t take into account the punitive damages that will surely be awarded to the victims – to the families of the victims. The dozen people – so far – who were killed as a result of the known-to-be-defective cars.

But even that isn’t the biggest worry.

The thing that may prove fatal is not so much cash lost but faith lost.

People buy cars for many reasons, but one reason people won’t buy a car is suspicion of Lemonhood. That it might be shoddy. That the company is shady. Does it get any shadier than continuing to purvey cars with known defects for nearly ten years after the defect came to the company’s attention?

That is pretty doggone shady.

And that shadiness casts a long shadow. A potentially all-encompassing one.

On the one hand, people don’t trust GM. That’s the emotional reason to avoid GM vehicles – irrespective of their otherwise-appealing qualities. But there’s a rational reason, too.

Depreciation.

Or rather, the prospect thereof.

We know the affected models have shed resale value like a full-blown AIDs patient sheds bodyweight. But how will this debacle – the public’s growing skepticism of GM’s basic integrity – affect current GM models? They may not have defective ignition switches – but if, as a result of the taint associated with the affected models – their resale value is lower-than-average, bet your bippie it’s going to affect GM’s future bottom line. Not just sales – but leases, too. Cars that don’t hold their value well cost more to lease (if the automaker doesn’t cook the books – lease ’em at a loss, for the sake of maintaining appearances – and that can only be done for so long. Ask Mitsubishi).

GM – anyone – might have gotten away with major shenanigans back in the ’60s, ’70s – and even into the ’80s and ’90s. But not now. There’s too much coverage – and very little tolerance for shenanigans. Because there are so many alternatives.

Sure, GM has some great stuff in its inventory. The thing is, so does everyone else. And everyone else doesn’t have a dead chicken hanging around its neck, like a farm dog who got into the coop again. Yeah, the new Corvette is a sexy bitch. But she just might have the clap.

16 COMMENTS

Tesla and Elio motors don’t seem to have much Detroit connection. I wonder if new manufacturers not being based in Detroit is not an early warning of the future irrelevance of Detroit as the center of the automotive industry. So it may not just be GM, it might be the whole Detroit business culture that is showing signs of dying. The ignition switch failure is kind of an indication that they really do not know how to make cars at a very basic level.

Important to note that GM sales are booming in China, on their 1990s models with 1980s drivetrains. They took all the old tools and presses from the old models and shipped them over to China, where a 2 cycle straight pipe scooter is still the standard family car.

Fuel economy? Who cares? If the Chinese government isn’t making it an issue GM doesn’t. Same with air quality, saaaaaaaaftee (not that cars in the 80s were unsafe, just that they don’t have airbag cocoons) and other modern stuff we consider standard equipment.

Of course the reason stated is because the Chinese can’t afford all those nicities we have in the US. The reality is becuase the Chinese don’t buy on credit, they won’t pay 30% of their future income on a depeciating asset. Car dealers are really selling suckers to banks, not cars to people. When your customer is the buyer you try to produce an inexpensive product. When the bank is your customer you make an expensive product and work the slave for as long as possible.

And the reason why China is doing so well for GM is just the law of large numbers. When you are talking about billions of people, it’s a fairly sure bet that you can get a few million sales just by showing up. If your cost structure is based on selling to a few hundred million people (and you’ve already depreciated the factory once), any idot can turn a profit. No wonder GM likes China.

GM has vehicles designed/made in and for China and it has cars it brings over.

The Buick brand still has an excellent reputation in China. Probably the only place it has any brand that hasn’t been tarnished.

China’s method of controlling automobile pollution is limiting how many license plates are issued. Not government standards, not property rights based methods, just controlling who may and may not have a car and how many cars they may have. American control freaks would love that.

RE: “because the Chinese can’t afford all those nicities we have in the US. The reality is becuase the Chinese don’t buy on credit, they won’t pay 30% of their future income on a depeciating asset.”

I dunno about that.
They can “afford” housing prices that are much higher than in the unitedstate, resulting in the creation of a the worlds biggest housing bubble.
They have a larger middle class than the unitedstate does.
They can “afford” to buy property in Australia and the unitedstate for millions of Dollars, sight unseen.
They line up to get lifetime loans from banks, of which they can Never repay and which are passed onto the next generation, all just to have the privilege of staking a claim on the biggest overpriced depreciating asset of them all: housing.

Car dealers are really selling suckers to banks, not cars to people. When your customer is the buyer you try to produce an inexpensive product. When the bank is your customer you make an expensive product and work the slave for as long as possible.

Yup, exactly. IIRC, a previous warden of GM stated a decade or so ago, publicly, that GM’s credit business was hauling in more profits each year than its auto business (and GM’s credit company’s loans weren’t always auto-related). Given that statement, it’s a wonder GM didn’t just stop making cars altogether. Why invest expensive real capital to make something of tangible value when you can just go with the flow and dabble in speculative finance like the rest of (what little remains of what was once) the Amerikan economy?

That’s what this country has rewarded for decades. Finance. Trading. Banking. Making things is just too difficult, too hard, and often punished for the slightest problem or even when there was no problem.

Then we hear the moans that aren’t enough americans in science and engineering. Well? Wonder why that is? Because smart people who can hack it through the course work can have better careers in the money changer businesses.

Not to diminish GM’s long standing reputation of installing defective and poor quality components across the product line for decades, but I am at a loss as to why people wreck the car when the engine quits. Cars used to die often and without warning. I know from experience that a 5000 lb Cadillac is quite a handful without power steering and brakes, but wouldn’t a 3000 lb Cobalt be easier to control? Maybe vehicles need fewer conveniences so drivers realize they’re operating a machine instead of a mobile infotainment system.

Absolutely. But, just as many people can’t drive a car with a manual transmission, probably even more people have never dealt with a car that didn’t have power steering (and power brakes). It’s also possible that the steering wheel locked in position – ignition off – and that would be unrecoverable.

When my father taught me how to drive one of the lessons was what to do should the engine die. While driving he would reach over and turn off the ignition. Conversely he also taught what to do should the throttle stick open. I taught these lessons to my son when I taught him to drive. I was under the impression that these were SOPs for teaching driving. Guess not going by this GM story and the Toyota “scandal”.

One of the demonstrations I have my high school students perform is to take their car next door to a large parking lot, drive 25 and apply the service brakes. Then repeat using only the parking brake and then we note the differences in stopping distances, usually 25 feet vs. 75 to 100 feet with long black tire stripes. I then get them to realize that the parking brake is NOT the emergency brake as sliding rear tires are not conducive to vehicle control.

I also instruct them to switch the ignition lock to the off (not lock) position steer and brake to see what happens when engine power is gone. Many of today’s youth do not have vehicles and certainly driver’s ed does nothing to prepare them for driving emergencies other than how to pick up your cell phone dropped when texting.

Many years ago I remember two items regarding emergency maneuvers: Many people unaccustomed to the sound of locked tires sliding actually release the brake pedal when startled. The other that ABS would kill drivers because they would now drive with abandon safe with the knowledge that technology would save their butts. I guess that second prediction is coming true now what with the advent of driverless cars.

I agree. GM has displayed so much malice toward it’s customers that it deserves to go out of business.

What is annoying is that we all know that huge insurance companies and financial institutions do MUCH more evil and harm on an ongoing basis. But they will never be brought to daylight or justice. Because they have too much legal clout. Plus they are interlinked with the evil entities who hold the reins of power.

Anyway, back to GM. I think the best thing would be for Toyota to buy it at a fire sale discount price, then merge their product lines.

MIKE,”I think the best thing would be for Toyota to buy it at a fire sale discount price, then merge their product lines.”

I would hope not. Not to steal from Eric’s great line about the new Corvette but Toyota should not get in bed with the AIDS and herpes and every other STD infested GM. I do not see anything positive for Toyota or any other company buying GM. The unions would be enough reason alone to stay away from that purchase.

But I would like to see someone take the chance of the clap and save Corvette.

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Eric started out writing about cars for mainstream media outlets such as The Washington Times, Detroit News and Free Press, Investors Business Daily, The American Spectator, National Review, The Chicago Tribune and Wall Street Journal.